Classification of Investments and Investment Alternatives in India
Table of Contents
Classification of Investments
Wide ranges on investment alternatives are available for investors. On the basis of these alternatives, investment can be classified into four main categories:
1. Physical Investments: Physical investments are made in tangible assets like motorcars, aero planes, ships, buildings, plant and machinery, equipment etc. which may or may not be used for further production. Some of the physical assets like plant and machinery, equipment etc. are useful for further production whereas some like gold and silver ornaments, motor cars etc. are not useful for further production.
2. Financial Investment: Financial investment is an asset in which money are put into financial assets with a hope that its value will be appreciated in future. Examples of financial investment are shares, debentures, bonds, bank deposits, insurance schemes, NSCs etc.
Financial investment can further divided into the following ways:
a) Marketable and Non-Marketable Investments: Some investments which are listed on the stock exchanges are easily marketable and can converted into cash within a short period of time e.g. shares, bonds and other instruments issues by government or companies.
Non-marketable investments like bank deposits, provident funds, insurance schemes etc. cannot be bought or sold in the open market in the stock exchanges and thus are difficult to be converted into cash immediately.
b) Transferable and Non-Transferable: Transferable investments are those which are easily transferable in the name of any party e.g. shares, debentures, bonds can be transferred in the name of others or can be sold or exchanged for cash or kind, whereas non-transferable investments are those which cannot be transferred to any other party e.g. insurance certificates, NSCs, cannot be transferred.
Investment alternatives in India
Wide varieties of investment avenues are now available in India. An investor can himself select the best avenue after studying the merits and demerits of different investment avenues. There are many newspapers, magazines, news channel who offers guidance to investors in the selection of suitable investment avenues.
A wide range of investment alternatives are available, they fall into mainly two broad categories, viz, physical investment and financial investment. Apart from these investments can also be divided into marketable & non-marketable and transferable & non-transferable securities which are discussed above. Some of the important investment alternatives are given below:
1. Non-marketable securities or Non-marketable Financial Assets:
A good portion of financial assets is represented by non-marketable financial assets. Non-marketable financial assets are those which are not traded in open market like marketable securities. A distinguishing feature of these assets is that they represent personal transactions between the investor and the issuer.
For example, when you open a savings bank account at a bank you deal with the bank personally. In contrast when you buy equity shares in the stock market you do not know who the seller is and you do not care. These non-marketable financial assets can be classified into the following broad categories:
a)Money market instrument: By convention, the term “money market” refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. Examples of money market instruments are T-Bills, Certificate of Deposit, Commercial Paper etc.
b)Life insurance: Now-a-days life insurance is also being considered as an investment avenue. Insurance premiums represent the sacrifice and the assured sum the benefit. Under it different schemes are:
1) Endowment assurance policy
2) Money back policy
3) Whole life policy
4) Term assurance policy
c) Apart from these some of the most popular non-marketable financial assets which are considered very safe by Indian investors:
-Post office deposits
-Provident fund deposits
2. Marketable securities or Marketable financial assets:
Marketable securities are those which are listed in stock exchange and can be easily converted into cash as and when necessary. Some of the most important marketable securities are:
a) Equity shares: By investing in shares, investors basically buy the ownership right into that company. When the company makes profits, shareholders receive their share of the profits in the form of dividends. In addition, when a company performs well and the future expectation from the company is very high, the price of the company’s shares goes up in the market.
This allows shareholders to sell shares at profit, leading to capital gains. Investors can invest in shares either through primary market offerings or in the secondary market. Equity is a high risk investment option and also return from equity shares is also very high.
b) Preference Shares: Preference shares refer to a form of shares that lie in between pure equity and debt. They have the characteristic of ownership rights while retaining the privilege of a consistent return on investment. Investors of preference share will get fixed rate of dividend in preference to equity shares. This investment is less risky as compared to equity but also return on preference shares is less.
c) Debentures and Bonds: These are essentially long-term debt instruments. Fixed rate of interest is paid to the investors of debentures and bonds. Debentures and bonds are secured against the floating charges on the assets of the issuer. Many types of debentures and bonds have been structured to suit investors with different time needs.
Debentures and Bonds are the instruments that are considered as a relatively safer investment avenues. Risk in debentures is higher as compared to bank fixed deposits but bonds and debentures offer higher returns.
d) Mutual Fund Schemes: Mutual funds schemes are now getting popularity in our country. This is the most preferred and relatively safe investment avenue for Indian investors. Mutual fund is simply a pool of funds which is collected from investor for investment in various investment avenues available.
The Unit Trust of India is the first mutual fund in the country. A number of commercial banks and financial institutions have also set up mutual funds. Mutual funds have been set up in the private sector also.
These mutual funds offer various investment schemes to investors. The number of mutual funds that have cropped up in recent years is quite large assuring the investor better returns and lower risk options.
e) Financial Derivatives: These are such instruments which derive their value from some other underlying assets. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are Options and Futures. These investment options are very risky and used mainly for hedging risk.
3. Physical investments:
Physical investments are those which are made in tangible assets such as real estate, bullions, plant and machinery, equipment’s etc. These tangible assets can be used for productive or non-productive purpose. These investments involved huge amount and considered to be safe as compared to financial assets. Some of the physical assets are listed below:
a) Real estate: If anyone have huge surplus cash, than real estate viz land, building is considered to be safest and high return investment. With the ever-increasing cost of land and increase in population, real estate has come up as a profitable investment option.
b) Bullion Investment: The bullion market offers investment opportunity in the form of gold, silver, and other metals. Specific categories of metals are traded in the metals exchange. The bullion market presents an opportunity for an investor by offering returns and end value in future. It has been observed that on several occasions, when the stock market failed, the gold market provided a return on investments.
c) Art goods: Art goods creations with aesthetic values. Creative brains, skilled hands, dexterous fingers and deep reverence stand behind art goods. Art goods are bought by households, institutions, museums, are investors, art collectors and other art lovers. In metros, art market flourish, as a dealer or trade in art goods one can expect to make periodic return and capital gain as well.
d) Collectibles: Collectibles are diverse in nature. These range from dolls to stamps, from rare coins to antiques (like plates), from idols to juice boxes and so on. These have face value (in the case of coins, stamps), intrinsic value (in the case coins idols etc) and numisonatic value (value arising from rarity). Investments in these collective have to be held for longer period before these can be redeemed. In the case of stamps for years and years, the brokerage is also high.
e) Business Investments: Business investments are entrepreneurial investment. We may call business investments as economic investments. Here income is generated through processing, conversion, value addition. Investment in fixed assets of a business like land, building, plant, machinery, furniture, fixtures, captive facilities like power or water plants, etc and in current assets such as raw-material, working progress, finished goods, accounts receivable, bank balance, etc constitute business investment.